Much has been written about Millennials—if they are
moving back with their parents, whether they are buying cars or homes, how much
they are saving for retirement. There may not be consensus on all these issues
but one thing is clear: Millennials and debt go hand-in-hand.

Our research
using data from the National Financial Capability Study shows that two-thirds
of Millennials (those aged 23-35 in 2012) have at least one source of
outstanding long-term debt—whether student loans, home mortgages, or car payments—and
30 percent have more than one. Among the college-educated, a staggering 81
percent have at least one source of long-term debt

Not only do Millennials carry debt, but
they struggle with it. A majority report having too much debt, difficulty in making
payments, and worries about it. Specifically, the ability to pay off student
loans troubles more than half of Millennials who have such loans. Low-income
respondents tend to be more concerned than higher-income earners, but even 34
percent of Millennials with annual household income above $75,000 doubt they
will be able to repay their student loans. Moreover, even several years after
college, the percentage of those worried about repaying student loans remains
high. Fifty-four percent of Millennials who are over age 30 and have student loans
are worried about repaying them.

Along with long-term debt, Millennials
also carry short-term debt, most often from credit cards. This debt can be
costly. More than half of Millennials’ credit card users say they carried over
a balance—for which they were charged interest—in the last 12 months. A sizable
share has been hit with late fees (22 percent), over-the-limit fees (13
percent), and fees for cash advances (14 percent).

The use of alternative financial
services (AFS), such as auto title loans, payday loans, pawnshops, rent-to-own
loans, and tax refund advances, represents another significant source of short-term
debt. More than two-in-five Millennials in the study relied on AFS at least
once during the five years prior to the survey. Those turning to these services
are not always low income: More than a quarter of Millennials with annual
household income higher than $75,000—four times the poverty level for a
standard household of three—have used AFS.

It doesn’t end there. Millennials are tapping
their bank and retirement accounts. Twenty-nine percent with bank accounts
report occasionally overdrawing them, and 22 percent of retirement-account
owners took loans or hardship withdrawals in the 12 months prior to the survey.

While these findings should worry Millennials, there
is something that should concern all of us: This next generation is not
prepared for the financial engagement it faces. Millennials give themselves high
marks on their financial knowledge. Yet the data show that only 8 percent of them
could correctly answer five questions used to assess understanding of the
fundamental concepts that define financial literacy.

They owe a lot. They know too little.
Millennials’ struggle with debt may eventually become our problem, too.

Several people and institutions have been advocating
for “just in time” education as an alternative to financial education. I take this
to mean that financial education should be provided at the point of sale. Academic
studies have found that financial knowledge decays over time, and “just in
time” proponents see on-the-spot education as a way to address that challenge.

But there are problems with the “just in time” concept.
For starters, all education—not just financial knowledge—erodes over time. If I
were to re-test my undergraduate and graduate students a few months after they
finish a course (any course!), the results would deviate from those of their
final exams. This hardly means we should sidestep teaching entirely, to replace
it with targeted information that is dispensed only as needed. Do you want to go to a Shakespeare play tonight?
Here is what he wrote and why he is so famous. No need to bother with a
literature course in college. “Just in time” ignores the value that comes
from education.

The second reason I question “just in time” is that my
academic research shows that financial literacy brings benefits. Financially
knowledgeable individuals are more likely to plan for future events, to save, and
to invest in higher return assets. But that knowledge is important before they take those actions. Indeed,
it is what positively influences their behavior.

For example, those who know about the power of
interest compounding understand the importance of starting to save early. For
those with no financial literacy, there is really no point of sales benefit –
no big sign that states “Come here if you have not started to save yet.” If
“just in time” is their only option, these people will not receive any
education. They will learn about the value of saving when they are close to
retirement, when it is already too late.

This underscores the more basic problem with the
“just in time” argument: Most financial decisions are not made at the point of
sale. Consider a home mortgage. By the time buyers come to a broker or a loan
officer at the bank, many decisions have already being made. The buyers may
have decided on the house they want to buy. But what if they have chosen a property
they cannot afford or they have not searched for the best offer? At that point,
“just in time” education is again too late. Consumers need financial knowledge before the dream of home ownership is
formed.

“Just in time” education reflects a pretty grim view
of financial education, which it seems to see as a bitter medicine that should
be dispensed in a targeted dose—nothing more—and only when needed. The
prevalence of financial illiteracy, combined with the many financial decisions
we constantly must make, demands a more comprehensive cure than that.

I was inspired to write this post after I was
contacted by a student in the personal finance course I have been teaching at
the George Washington University. He asked whether I was also teaching an
advanced course on the subject. That message came just in time!

My picture

About Me

Annamaria Lusardi is the Denit Trust Endowed Chair of Economics and Accountancy at the George Washington School of Business. Previously, she was the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College. She has taught at Dartmouth College, Princeton University, the University of Chicago Public Policy School, the University of Chicago Booth School of Business and the Graduate School of Business at Columbia University. From January to June 2008, she was a visiting scholar at Harvard Business School. She has advised the U.S. Treasury, the U.S. Social Security Administration, the Dutch Central Bank, and the Dartmouth Hitchcock Medical Center on issues related to financial literacy and saving. She is the recipient of the Fidelity Pyramid Prize, awarded to authors of published applied research that best helps address the goal of improving lifelong financial well-being for Americans. She holds a Ph.D. degree in Economics from Princeton University.